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The case for a financial approach to money demand

Listed author(s):
  • Xavier Ragot

    (PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption expenditures. This is a puzzle for theories which directly link money demand to consumption. This paper shows that the joint distribution of money and financial assets can be explained in a heterogeneous-agent model where both a cash-in-advance constraint and financial adjustment costs, as in the Baumol-Tobin literature, are introduced. Studying each friction in turn, one finds that the financial friction explains more than 78% of total money demand.

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Paper provided by HAL in its series Post-Print with number halshs-00978785.

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Date of creation: Mar 2014
Publication status: Published in Journal of Monetary Economics, Elsevier, 2014, 62, pp.94-107. <10.1016/j.jmoneco.2013.09.005>
Handle: RePEc:hal:journl:halshs-00978785
DOI: 10.1016/j.jmoneco.2013.09.005
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00978785
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